Detroit Pension Ruling: Should Workers in Other Broke Cities be Scared?

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Detroit's historic bankruptcy will move forward after a judge ruled the broke city is eligible to shed its massive debt, and now current and former city workers are holding their breath over the fate of their pensions.

U.S. Bankruptcy Judge Steven Rhode ruled Tuesday that Detroit is eligible for Chapter 9 bankruptcy protection and that city officials can negotiate with bondholders, pension funds and unions.

The restructuring it's the largest municipal bankruptcy in U.S. history with an estimated $18 billion in liabilities, nearly half of which are tied to pension funds to current and retired city workers.

The hearings on the city's insolvency have taken place over the past several months and hinged on whether Detroit's filing was in good faith. Only with this designation would retiree's benefits be allowed to be cut.

Rhodes ruled Tuesday that Michigan's state constitution, which says pension benefits could not be touched under bankruptcy filing, was not a viable protection in bankruptcy.

"I think this is a very scary day, because what the judge has done here is he has said that the state constitution, that specifically and expressly protects vested pension benefits, can be taken away in bankruptcy," American Federation of State, County and Municipal Employees attorney Sharon Levine told FOX Business. "That is very scary."

After the ruling, Detroit Mayor Dave Bing said the judge's decision was positive for the city's residents and an important step in repairing its balance sheet.

Bing told reports that residents would see "lights come on, improved bus services and improved police and fire response times." He also said it isn't a bad move for pensioners "just yet."

"I don't know that it is bad for the pensioners just yet. There are more negotiations that will take place. All of our focus has to be on what is best for the citizens of Detroit. I don't think we want to be in a position where we put the citizens against the pensioners. There is going to be pain that goes around, and we've got to figure out how we can mediate the least amount of pain for any one individual."

Emergency city manager Kevyn Orr told reporters the city was happy with the decision but eager to move forward.

"While we are very pleased, we remain very concerned about the need to adjust the city's debt, to improve its level of services to citizens, and to also prepare the city to exit it's receivership in a fashion that restores democracy to the city," Orr says.

While the decision has not been made on whether pensions will get cut, Mark Sweet, bankruptcy attorney at law firm Fox Rothschild says the judge's decision means other struggling cities and municipalities may now see bankruptcy as a way out.

"There will certainly be other municipalities looking at Detroit and thinking that bankruptcy isn't such a bad idea," Sweet says. "Some cities are suffering worse than others and are in a hole they can't get out of. People [in struggling cities and municipalities] may start discussions with their pension funds and unions to modify their pensions."

The city's 30,000 retirees have been waiting since the July, when the city filed for Chapter 9 bankruptcy protection, to learn their retirement fate. In October, retired city workers under age 65 received a letter from the local government notifying them they would no longer receive full health benefits. Instead, they will receive a $125 stipend to shop in Michigan's state health care exchange under the Affordable Care Act.

While the exact amount of pension cuts has yet to be determined, Rhodes said Tuesday he will not accept any cuts that are too "steep."

"Rhodes sent a pretty clear message that pensions can be cut, and Orr has sent a pretty clear message that he will propose a plan to cut pensions," Sweet says. "The next question is how much will the city propose to cut, and how much will the judge say is too much?"

Sweet says he wouldn't be surprised if Detroit moved to cut between 10 percent and 15 percent of retiree's pension funds, which he expects Rhodes to approve.

"There are people in Detroit who are barely making ends meet and who rely on these pensions to survive day to day," Sweet says. "A 10 percent to 15 percent cut for someone who is barebones and relying on a city pension will really hurt."

The decision will also be appealed by various pension attorneys. Jerome Goldberg, a pension attorney representing city retirees, spoke out after the ruling, urging pensioners to take action.

"Clearly this ruling is a threat to every pensioner in the city of Detroit, it says their pensions are subject to be impaired and reduced in bankruptcy," Goldberg told FOX Business. "And it means they better start mobilizing and not rely on the court to defend the fruits of their labor for 30 years."

Once Orr proposes a plan, the court must approve it, then creditors will place their votes and the court will review the plan once more before it is implemented, Sweet says. A process that could take anywhere from six months to a full year to complete.